Report: SEC opens inquiry into Herbalife

Updated at: 01/09/2013 3:37 PM
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(AP) NEW YORK - Questions over Herbalife Ltd.’s business model have pummeled the nutrition and weight loss company’s shares and reputation in recent weeks. Now the company is reportedly the target of an SEC inquiry.

The Wall Street Journal reported on Wednesday that the Securities and Exchange Commission has launched a probe into the Los Angeles company. The newspaper cited an unnamed person close to the inquiry.

Representatives for the SEC and Herbalife both declined to comment.

The SEC conducts inquiries privately and reviews findings before determining whether to take any enforcement actions, if any.

Herbalife has been grappling with questions about its business model, which involves using a network of distributors to sell its products. On its website, the company describes itself as "a global nutrition company that has helped people pursue healthy, active lives since 1980."

Last month Pershing Square Capital Management’s William Ackman said he had been shorting the stock for several months upon concluding that the company is a pyramid scheme.

Herbalife vehemently denied that it is a pyramid scheme, suggesting that Ackman was trying to illegally manipulate its stock price to make money. It said in a statement at the time that Ackman’s comments were "a malicious attack on Herbalife’s business model based largely on outdated, distorted and inaccurate information."

Another well-known investor, Greenlight Capital’s David Einhorn, raised concerns about Herbalife’s business in May.

The company plans to give a comprehensive response to investor questions on its business model on Thursday morning during an analyst and investor meeting.

Herbalife got a boost of confidence on Wednesday from another prominent hedge fund manager, Third Point LLC’s Dan Loeb, who disclosed in a filing that Third Point owns 8.9 million Herbalife shares.

Trading of the stock was briefly halted Wednesday morning following a 9 percent spike on news of Loeb’s investment. Shares were choppy after trading resumed, and the stock ended up gaining $1.42, or 3.7 percent, at $39.77.

The stock hit a low of $24.24 in late December as a result of Ackman’s allegations, their weakest level since July 2010. Shares have lost close to half their value since the end of April.

Herbalife, which is incorporated in the Cayman Islands and has its principal operating subsidiary in Los Angeles, sells its products in more than 80 countries through 2.5 million independent distributors.